Further dovish Fed rhetoric helped underpin risk appetite on Tuesday.

Further dovish Fed rhetoric helped underpin risk appetite on Tuesday. US bond yields declined to 2-week lows with the 10-year yield below 1.60%. Wall Street equities failed to hold gains amid underlying inflation concerns. Global equities were mixed with limited net gains in Asia.

The dollar dipped to 4-month lows and was unable to secure significant relief. EUR/USD posted 4-month highs above 1.2250 and held near this level on Wednesday. Sterling failed to hold its best levels with GBP/USD selling above 1.4200. Commodity currencies pared gains to some extent, but strong New Zealand dollar gains boosted the Australian dollar.

The German IFO business confidence index strengthened to a 2-year high of 99.2 for May from 96.6 the previous month and above consensus forecasts of 98.2. The current assessment index strengthened to 95.7 from 94.2 previously while the expectations component strengthened to 102.9 from 99.2 with both components above expectations. The IFO stated that the economic recovery is gathering pace with a strong boost in expectations surrounding tourism and hospitality. The IFO also noted that rising costs for raw materials are increasingly being passed on and many companies plan to hike prices.

The survey maintained expectations of a solid Euro-zone rebound which helped underpin the Euro and the dollar remained under pressure following the latest batch of dovish Fed rhetoric. EUR/USD strengthened to 4-month highs around 1.2265 before consolidating ahead of the New York open.

ECB council member Villeroy maintained a dovish stance with comments that the bank can tolerate inflation above 2% for some time with the Euro retreating slightly.

The Richmond Fed manufacturing index strengthened marginally to 18 from 17 previously with a slightly faster rate of growth in new orders for the month. Labour-market indicators remained tight with serious skills shortages while there was a further surge in prices for the month with prices paid close to record highs.

Fed vice-chair Clarida commented that the markets seem to understand the Fed’s new strategy and he expected inflation to remain well anchored, although the central bank was putting a lot of weight on inflation expectations. He added that there could be a time in upcoming meetings when the Fed can discuss scaling back bond purchases. San Francisco Fed President Daly stated that the Fed is talking about talking about tapering.

Fed rhetoric was not strong enough to provide significant US dollar relief with the US currency which remained close to 4-month lows and EUR/USD traded just above 1.2250 in early Europe on Wednesday.

The Chinese yuan strengthened in early Europe on Tuesday with the offshore rate strengthening through the 6.40 level against the US dollar. There was no apparent opposition to currency gains from the Chinese authorities which increased expectations that there would be further yuan appreciation.

The Case Shiller house-price index recorded a 13.3% increase in the year to March from a revised 12.0% previously. Consumer confidence declined marginally to 117.2 for May from 117.5 and slightly below consensus forecasts. April new home sales declined to an annual rate of 863,000 from 917,000 amid supply-side difficulties.

USD/JPY found support above the 108.50 level and rallied to the 109.00 area as the yen lost ground on the crosses. The US currency was still hampered by a decline in US bond yields and USD/JPY failed to hold above the 109.00 level amid wider losses.

The Chinese yuan maintained a firm tone on Wednesday and traded close to 3-year highs and there were expectations of further medium-term gains which curbed wider US currency support. USD/JPY traded around 108.80 in early Europe with EUR/JPY above 133.00.

The CBI retail sales index edged lower to 18 for May from 20 previously and below consensus forecasts of 30. Retailers were relatively cautious over the outlook with some concerns that initial demand after the easing of lockdown restrictions would fade quickly. There was also a further decline in employment for the month while price pressures increased. The data triggered some reservations over the outlook for a sustained boost to consumer spending and wider recovery.

GBP/USD briefly pushed above the 1.4200 level, but failed to challenge the 2021 highs and also failed to hold this level with some fresh concerns that a strong UK recovery had been priced in. There were also concerns that supply-side issues could limit the UK recovery. Overall risk conditions were relatively steady and GBP/USD held above 1.4100 with a rebound to just above 1.4150 on Wednesday while GBP/EUR dipped below 1.1550.

Economic Calendar

07:45Consumer Confidence(MAY)94
09:00CHF ZEW Expectations(MAY)68.3
12:00USD MBA Mortgage Applications1.20%
15:00FOMC Governor Keith Randal Quarles Speech
15:30USD Crude Oil Inventories1.321M
18:00BoC Governor Member Timothy Lane
20:00FOMC Governor Keith Randal Quarles Speech

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